Having Trouble Securing a Loan for Your First Home?
Even if you have 15 to 20% of the property value for down payment, it may not be enough to quality for a loan, under the new rules, from a traditional lender such as a bank. As of January 1, 2018, new regulations will be in place which will make it harder for first time homebuyers to secure the loan they need.
If you are in one of the situations below, we can provide alternate solutions to help get you the home you want.
- You do not meet the regular bank-lending criteria and need to work with an alternate lender
- You are now required to qualify at an above-contract level
- You have 20% down payment or want to refinance your home
What are the New Rules and What’s the Impact?
Higher Qualifying Rate for Uninsured Mortgages
The rate will be the greater of the five-year benchmark rate published by the Bank of Canada OR the lender contractual mortgage rate +2.0%. For example:
- 20% down payment
- 5-year fixed mortgage rates of 2.84%
- 25-year amortization
A family with an annual income of $100,000 can afford a home worth $693,405.
- Applying the new “stress-test”, the family must qualify for the mortgage using the greater of 4.89% and 4.84% (calculated as 2% + 2.84%).
- Therefore, with 20% down payment, a 5-year fixed rate of 4.89%, and 25 year amortization, the family can now afford a home worth $591,537.
The difference is that under the new rules, the family’s affordability has dropped by $101,868 (-15%). A bank that was willing to lend them $700,000 before is now only able to loan them approximately $600,000.
The biggest impact will be on the amount for which the home buyer/owner will be able to qualify. Previously, the home buyer/owner qualified at the contract rate offered by the lender. While the actual mortgage payment will still be paid at the contract rate, a higher calculation will be used for qualification purposes.
Yes, home owners will still have the ability to refinance up to 80% of the value of their property. You will have to pass the same stress test which is the higher of the Bank of Canada five-year benchmark rate OR the contract rate from the lender plus 2%.
Lenders will be required to enhance their loan-to-value (LTV) measurement and limits to ensure risk responsiveness.
Mortgage lenders (excluding credit unions and private lenders) must establish and adhere to appropriate LTV ratio limits that are reflective of risk and updated as housing markets and the economic environment evolve.
What does this mean for you?
OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.
Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.
What does this mean?
For example: a consumer applies for a mortgage with an 80% LTV and the lender can only approve 65%. The lender then partners with a second lender for the additional 15%. The original lender then “bundles” the 15% LTV mortgage with the original 65% mortgage to form the complete 80% LTV loan. This is no longer permitted as per OSFI.
Have 15 to 20% down payment but finding it hard to qualify with the new rules?
We can help, contact us today!